what do you want, and who will manage getting there?
by marc rosenberg
cpa firm mergers: your complete guide
mergers of equals or firms close to equal (some call these sideways mergers) are much less common than mergers in which there is a clear survivor. but they do occur.
more: 61 things buyers should explore with sellers | why merging in smaller firms is fabulous | 13 reasons to merge up | thinking merger? first ask why.
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there are two reasons that mergers of equals are rare.
first. mergers of equals are much more difficult to negotiate. in traditional mergers where there is a clear surviving firm, the buyer is in a strong position to dictate the deal terms and governance policies, and the seller respects this.
but in a merger of equals, everything is on the table. usually, neither firm is able to dictate terms to the other. the sheer number of highly sensitive issues that need to be negotiated can feel overwhelming and try the patience of the merger partners. these issues include who will be the survivor, the name of the new firm, how the new firm will be managed, how partner compensation and retirement will work and which software programs will be used. some of these issues can be very difficult to agree on, so they can be a huge complication for firms pursing a merger of equals.
second. in a merger that is more an acquisition, the buyer offers the seller tremendous benefits and vice versa. but in a merger of equals, though both firms expect the benefits to be meaningful, those benefits don’t happen automatically. let me explain.
- when a larger buyer acquires a small, retirement-minded seller, the benefits are clear, tangible and short-term: sellers get a much sought-after exit strategy and are able to redeem the value of their firm. buyers increase their revenues and profits soar because they don’t have to compensate the selling firm’s owner(s). everyone clearly and quickly wins.
- in a merger of equals, the reasons for the merger are more indirect, intangible and long-term. some reasons for mergers of equals could be:
- one firm is strong in audit and the other in tax.
- one firm has a strong managing partner and the other has weak management.
- the two firms operate in two different markets.
the benefits of these synergies don’t happen automatically. someone has to manage the firm and focus on achieving these merger goals. though the benefits are substantial if the firm is managed correctly, they are longer term in nature.
high-level issues both firms need to address
the issues that follow are germane to mergers of equals. but because mergers of equals are much more wide open, both firms should give a lot of thought to other issues to discuss with the merger partner, all with a focus on determining, as much as possible, what life will look like once the firms merge.
- start by having the firms discuss with one another:
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- how they see the benefits of a merger
- overall thoughts on the merger
- specific concerns: “if x doesn’t happen, we’re not interested.”
- both should describe the culture and personality of their firms. what is considered a sin at each firm?
- what characteristic, practice, policy or habit that, if present at one firm, would cause the other firm not to want the merger?
- what are each firm’s deal-breakers and nonnegotiables?
- each firm should discuss how they expect their staff will react to the merger.
- each should reply to this: as of now, do you want to do the merger? if so, why? if not, why not?
issues to negotiate and agree on
- what will the name of the firm be?
- what will be the firm’s location? what office lease issues need to be addressed?
- what is the vision of each firm? for growth? services provided?
- how will the new firm be managed?
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- who will be the managing partner?
- what will the management structure be? executive committee? department heads? branch offices? industry team leaders? coo?
- what say, if any, does each firm want to have in the firm’s management? if the firm is large enough to have an executive committee, what are each firm’s thoughts about having one or more seats?
- management philosophy: corporate vs. partnership model.
- style of management: formal or informal?
- how will it be determined if each firm’s equity partners become equity partners in the new firm? if some do not become equity partners, what role, if any, will they have? non-equity partner? of counsel? manager? etc. will any be asked to leave?
- if one or more partners from either firm choose to opt out of the merger, how will this be handled?
- what does each firm feel about what it means to be a partner:
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- doers vs. delegators
- working in the business vs. working on the business
- high vs. average vs. low billable hours
- business development vs. client service only
- generalist vs. specialist
- responsibility to mentor and develop staff well
- accountable for their performance and behavior vs. allowed to do what they want. if accountable, how?
- what will be expected of each partner? will there be formal, written goals? what role will each partner play in the new firm?
- how will partner income be allocated?
- how will partner retirement/buyout benefits work?
- how will new partners be brought into the firm?
- what will be each partner’s ownership percentage and capital?
- what will be included in the partner agreement?
- are both firms comfortable with noncompete and nonsolicitation covenants?
- how will the staff of each firm mesh regarding personalities, titles, compensation and benefits, personnel policies including remote work, office and work area assignments, etc.?
- how compatible are all the metrics? where there are significant differences, how will the gaps be bridged?
- what technology will be used by both firms? this includes when technology changeovers and software conversions will take place.
- how compatible are quality control policies and issues?
- how compatible are office hours expectations and remote work policies?
- how will the firms deal with sacred cows, unproductive people (including partners), dirty laundry, redundant positions (firm administrator, a&a and tax pic)? does anyone need to get off the bus before the ignition is turned on?
- are there any malpractice issues, past, present or future?
- what will the effective date of the merger be?
- what will be the wording and timing of announcements?